Sidechains

Earlier this year some entrepreneurs walked into our office and explained sidechains to us. I was pretty excited about the concept then and I continue to be excited about it. This past week some of the people who explained them to us and some other people I don’t know published a paper about sidechains called Enabling Blockchain Innovations with Pegged Sidechains. I think this is an important paper and everyone involved in bitcoin, blockchains, and cryptocurrencies should give it a read.

Here’s the basic idea in layman’s terms. I am purposely trying to dumb down and simplify the idea here.

1) The Bitcoin Blockchain is the most liquid blockchain, has the most mining on it, and is likely to remain that way given the network effects it has built up over the past five years.

2) The core Bitcoin system and software is not likely to change very much because making changes to it is risky and there is a lot of capital at stake on the Bitcoin blockchain now.

3) There are things you might want to do that are not well supported or not supported at all on the Bitcoin blockchain.

4) This desire for “other things you might want to do” has given rise to a ton of alternate blockchains, none of which have developed a lot of liquidity and mining on them.

5) So what if you created “sidechains” that are “pegged” to the Bitcoin blockchain that allow “other things you might want to do” while still leveraging the liquidity and mining of the Bitcoin blockchain?

That’s the basic idea and the paper I linked to explains how to do the “pegging” part which is critical to this whole idea working.

I believe that the core Bitcoin system and software will have to be modified to allow these “pegs” and I’m pretty sure (but not positive) that these changes have not yet been made.

It will be interesting to watch how all of this develops over the next year or two. If “pegs” are added to the core Bitcoin system and software, and if sidechains become popular and viable, then Bitcoin would essentially become the reserve currency of the entire cryptocurrency sector and there would be a host of sidechains and currencies that are pegged to it. This would allow a ton of innovation to happen around Bitcoin without requiring a lot of change to the underlying Bitcoin system. Which seems sort of ideal given how much money ($5bn at current prices) is at stake now.